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5 Technology Bigwigs to Buy on the Dip Despite Recent Turmoil

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·7 min read
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The technology sector, which enabled Wall Street to get rid of the coronavirus-induced short bear market and formed the new bull market, suffered a bloody blow as soon as 2022 started. Soaring inflation since mid-2021 has compelled the Fed to terminate the quantitative easing program and raise the benchmark lending rate earlier than expected. Consequently, the blood bath in the technology sector has been visible year to date.

However, we believe the recent meltdown is temporary and the technology sector has vast potential. At this stage, technology bigwigs like Advanced Micro Devices Inc. AMD, Keysight Technologies Inc. KEYS, Cadence Design Systems Inc. CDNS, Intuit Inc. INTU and GLOBALFOUNDRIES Inc. GFS with attractive valuations, should prove beneficial to investors.

Recent Mayhem in Technology Sector

The technology stocks are the major casualties of market participants’ anticipation of the beginning of a higher interest regime in 2022. On Jan 26, in the post-FOMC meeting statement, Fed Chairman Jerome Powell indicated that the first rate hike in three years could be implemented as early as in March. The central bank’s quantitative easing program will also end in March.

In a separate press statement, the FOMC had also indicated that the Fed is thinking of shrinking its $9 trillion balance sheet later this year. Meanwhile, the consumer price index for January rose 7.5% year over year, prompting a large section of economists and financial researchers to predict a 50-basis point hike in the benchmark lending rate in March instead of the market’s expectation of a 25 basis-point hike.

Some investment bankers have also said that the central bank may raise interest rate seven times this year with a magnitude of 25 basis points each time. Consequently, the yield on the benchmark 10-Year U.S. Treasury Note climbed more than 2% last week. The yield was 1.5% at the beginning of 2022.

Consequently, the Technology Select Sector SPDR XLK, one of the 11 broad sector-specific ETF of the S&P 500 Index has plummeted 12.3% year to date. The tech-heavy Nasdaq Composite has plunged 13.4% year to date.

Tech Has Vast Potential — Buy on the Dip

The leading emerging markets of Asia, Latin America, Africa and some European countries are still way behind in using digital technology compared to the developed world. While mobile phone penetration is nearly 90% in these countries, a large number of people are still using phones with old features, since voice communication and not data served most of their needs. Even those using smartphones, rarely utilize online digital features.

However, the outbreak of coronavirus quickly changed the lifestyle and lookout of these people. People were not entirely used to the digital platforms for their office work (work from home), ordering foods and other daily needs or transferring money and making payments. Moreover, online schooling, video conferencing and virtual networking have now become essential.

The countries that are more digitized have been able to minimize their losses during the pandemic. These are major lessons to the other countries. Even those who are less inclined toward the digital technology and online platforms, either because they have to learn using smartphones or tablets or due to fear of data theft, are now feeling the massive advantage of the online platforms.

Moreover, the impact of a higher market interest rate is already factored in the technology sector’s valuation to a large extent. Share prices of several technology behemoths have suffered a blow year to date.

Our Top Picks

We have narrowed our search to five technology bigwigs. These companies have highly established business models spread across the world, strong product pipelines, globally acclaimed brand recognition and robust financial positions, which help them to cope with a higher interest rate. Each of our picks carries either a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The chart below shows the price performance of our five picks year to date.

Zacks Investment Research
Zacks Investment Research


Image Source: Zacks Investment Research

Advanced Micro Devices is riding on robust performance from the Computing and Graphics, and Enterprise Embedded and Semi-Custom segments. AMD is benefiting from the strong sales of its Ryzen and EPYC server processors, owing to the increasing proliferation of AI and Machine Learning in industries like cloud, gaming and supercomputing.

The growing clout of 7-nanometer products in the data center vertical, driven by work-from-home and online learning trends, is a key catalyst of Advanced Micro Devices. AMD has raised its 2021 guidance for revenues on the back of strong growth across all businesses.

The Zacks Rank #1 Advanced Micro Devices has an expected earnings growth rate of 43.4% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 20.8% over the last 30 days. The stock price has dropped 20.9% year to date.

Keysight Technologies provides electronic design and test solutions to commercial communications, networking, aerospace, defense and government, automotive, energy, semiconductor, and electronic industries in the Americas and the Asia Pacific. KEYS is well-positioned to gain from solid demand for semiconductor measurement solutions, as semiconductor companies are increasingly developing chips based on next-generation process technologies.

Accelerated 5G deployments, 6G-related research applications and higher investments in 400G/ 800G ethernet for data centers bode well for Keysight Technologies. KEYS is likely to benefit from investments in defense technology modernization across all main regions.

The Zacks Rank #2 Keysight Technologies has an expected earnings growth rate of 10.4% for the current year (ending October 2022). The Zacks Consensus Estimate for current-year earnings improved 0.3% over the last 7 days. The stock price has slid 22.3% year to date.

Cadence Design Systems offers products and tools that help customers to design electronic products. Through the System Design Enablement strategy, CDNS offers software, hardware, services and reusable IC design blocks to electronic systems and semiconductor customers.

Cadence’s performance is being driven by strength across segments like digital & signoff solutions and functional verification suite. CDNS is also gaining from higher investments in emerging trends like IoT and autonomous vehicle sub-systems along with strength in the semiconductor end-market. Frequent product launches are expected to help the company sustain top-line growth.

Zacks Rank #2 Cadence Design Systems has an expected earnings growth rate of 9.1% for the current year. The Zacks Consensus Estimate for current-year earnings improved 0.1% over the last 60 days. The stock price has plunged 27.6% year to date.

Intuit is an application software developer providing financial management and compliance products and services for small businesses, consumers, self-employed and accounting professionals. The space in which INTU operates has huge growth opportunity.

Intuit’s flagship products and services include QuickBooks and TurboTax, which make it easier to manage small businesses and tax preparation and filing. Moreover, for the last few years, IINTU is trying to shift its business model from selling software to cloud-based subscription providers.

The Zacks Rank #2 Intuit has an expected earnings growth rate of 19.9% for the current year (ending July 2022). The Zacks Consensus Estimate for its current-year earnings has improved 0.2% over the last 60 days. The stock has plummeted 25.2% year to date.

GLOBALFOUNDRIES operates as a semiconductor foundry worldwide. GFS manufactures integrated circuits, which enable various electronic devices that are pervasive. The company delivers feature-rich solutions which enable its customers to develop innovative products for pervasive chips.

GLOBALFOUNDRIES manufactures a range of semiconductor devices, including microprocessors, mobile application processors, baseband processors, network processors, radio frequency modems, microcontrollers, power management units, and microelectromechanical systems.

The Zacks Rank #2 GLOBALFOUNDRIES has an expected earnings growth rate of more than 100% for the current year. The Zacks Consensus Estimate for its current-year earnings has improved 6.1% over the last 30 days. The stock has tumbled 23.5% year to date.


Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

Advanced Micro Devices, Inc. (AMD) : Free Stock Analysis Report

Intuit Inc. (INTU) : Free Stock Analysis Report

Cadence Design Systems, Inc. (CDNS) : Free Stock Analysis Report

Technology Select Sector SPDR ETF (XLK): ETF Research Reports

Keysight Technologies Inc. (KEYS) : Free Stock Analysis Report

GlobalFoundries Inc. (GFS) : Free Stock Analysis Report

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